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Project Finance

Green Final

TermDefinition
project finance definition financing a group of projects on a non-recourse basis through a specially created single purpose entity
non-recourse in case of a breach, no assets in the single purpose entity to take
primary prerequisite for successful project financing long-term financing contract
global project finance funding primarily loans, a bit of equity and bonds
Power Purchase Agreement Sale of brown electricity and green attributes, credit support, minimum delivery obligations
Interconnection Agreement Transmission service agreement, minimum service criteria, cash collateral
EPC contract acronym Engineering, Procurement, Construction contracts
EPC contract supply of equipment and construction services, delay damages and liquidated damages, warranties
O&M Agreement operation and maintenance of plant, availability and heat rate guarantees and bonus, credit support
Asset Management Agreement scheduling of power plant and profit sharing
Land-lease agreements access to land and easements
Partnership or LLC agreement Cash flow distribution and allocation of tax items, management of company, indemnities, buyout rights
Equity Capital Contribution Agreement Fixed and contingent capital contribution
Risk assessment for project financing Construction, Operation, Commodities market/fuel supply, offtake, transmission interconnection, resource, regulatory, project administration, political, currency/inflation/interest rate, underwriting, financial
Managing technical and resource risks know what you want to build and if it has been done before, thoroughly assess site (especially permits/access rights), thoroughly assess resource with independent engineers, financial models, distribute risk
Technology choice extremely important for financial institutions to get comfortable, ie Solar PV vs Solar Thermal, new tech is seen as riskier (harder to get financing), even incremental improvement causes headache
how to mitigate risk for bank bankability analysis, turn-key EPC contract, strong warranties, supplier credit to back guarantee claims, insurance
Environmental Considerations Phase I Environmental Assessment (ESA), II if necessary, species, wetlands, historical sites, permits, community, international
MBTA Migratory Bird Treaty Act
BGEPA Bald and Golden Eagle Protection Act
bird laws MBTA, BGEPA
Permits you need water, clean air, wetlands, ESA take potentially
Debt financing considerations recourse/non recourse, minimum DSCR, reserve accounts
Bond vs Bank loans to compare when you can obtain, payment schedule, term length, rates, payment schedule, oversight, prepayment, restructuring, size
Bonds vs Bank loans when you can obtain loans can be before actual work starts, bonds when viable
Bonds vs Bank loans payment schedule bonds are typically lump sum vs. loans in tranches
Bonds vs bank loans term typically 5-10 years for loan, bonds can match project length
Bonds vs bank loans rate loan typically floating, although some rate swaps, bonds are fixed
Bonds vs bank loans payment schedule loans typically more flexible to cash flows, bonds fixed
Bonds vs bank loans oversight loans have fairly significant control and oversight, bonds less
Bonds vs bank loans prepayment penalties low or none for loan, high for bonds
Bonds vs bank loans restructuring easier to restructure loan, may leak information to public with bond
Bonds vs bank loans size you can exhaust available commercial credit lines, not for bonds
Mini-perm loan a loan you get when you cannot secure permanent financing, usually used to pay off construction before project becomes profitable
Bond financing rate based off of credit rating, which can be long although some rating agencies make it less painful
Typical underwriting criteria for renewable energy banks vs credit agencies 1.0 DSCR for P99 or 1.3 P50 at banks, credit rating (bonds) typically requires 1.5 DSCR P50
Overall bonds vs loans loans used much more because although bonds can reduce financing costs it is offset by much more expensive and long financing process
Project Finance disadvantages longer execution time, higher transaction and debt costs, intricate risk allocation, high lender oversight (reporting and decision-making), higher insurance requirements, more disclosure
Modigliani and Miller Proposition Capital Structure is irrelevant as long as the firm's investment decisions are taken as a given
Evidence M and M prop is wrong people use project financing with high transaction costs anyways, use huge debt even if huge risk and minimal tax shields
Corp vs Project Finance comparisons Financing vehicle, type of capital, dividends/reinvestment, cap investment decisions, trans costs, credit evaluation, investor/lender base
Corp vs Project Finance financing vehicle multi-purpose firm vs single purpose entity
Corp vs Project Finance type of capital permanent with indefinite equity vs. finite time horizon matching life of project
Corp vs Project Finance dividend policy/reinvestment corporate management decides vs. fixed dividend payout with no reinvestment
Corp vs Project Finance transaction costs standardized so low vs. relatively high for complex special purpose vehicle
Corp vs Project Finance capital investment decisions opaque to creditors vs. transparent
Corp vs Project Finance credit evaluation overall financial health vs. technical and economic feasibility of project
Corp vs Project Finance investor/lender base broader/deep secondary market vs. higher and thinner market
Project Finance Advantages agency conflicts
Project Finance agency conflicts mitigates because all pre-agreed, also reduces underinvestment, increases risk management motivation
Moody's observations project finance default/recovery high default rate during initial years (construction) then default risk even below A rated transactions, 80% recovery rate from default
Created by: zkogut7
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